First, if you want to eliminate the complexities of the lease vs. buy question, it’s pretty simple: pay cash for the car. By paying cash you eliminate any interest payments and regardless of what happens in the future, you own the car. You’re paying with money you already have versus money you’re assuming you’ll have later on. That makes good financial sense.
But how many people have enough cash to buy a reliable car in a great condition? Not very many, according to statistics. That makes the question more complicated.
A lease is basically a long-term rental. You aren’t financing the value of the car. Instead, you’re paying the car company the difference between what the car costs now and what the car will be worth when you turn it back in. If your new car costs $25,000 and it’s projected to be worth $13,000 when you give it back, your lease is based on $12,000 plus interest. If you purchase the car, your loan is based on $25,000 plus interest. That’s why the monthly payment for leasing is so much lower.
You’ll Never Own the Car
The problem with a lease is that you never own the vehicle. You pay a bunch of money for a few years and then give the car back. In most personal finance circles, making payments on something you’ll never own is a really bad thing. It’s hard to argue that.
Leasing contracts are also very complicated. Don’t expect to understand all of the calculations and if you want to get out of your lease, you’re going to pay a lot of money to do it.
Finally, too many people use leasing as a way to drive more car than they can afford. If you calculate that you can afford a $450 car payment, you might notice that you can drive a luxury car if you lease versus an economy car if you buy. Don’t think that way.
Let’s use a 2016 Honda CR-V LX as our car of choice. The MSRP on the car is $24,811. As of the writing of this article, you could finance your new car between 2% and 3%. If you did a little bit of digging you can find 2.5% rates if your credit is outstanding so let’s use that number. If you bought your car, put $2,000 down, and took on a 36-month loan, you would pay $658 per month for your car. That’s $23,700 over the life of the loan. At the end of the loan you will own a car worth about $14,000 assuming it’s in perfect condition.
After owning it for 10 years, your car will be worth about $6,450 if we follow historical trends. If you plan to trade the car in at the dealer, plan on somewhere around $5,200. You’re also going to sink some money into repairs over 10 years. $400 per month on average. You might end up paying about $23,000 to own the vehicle over 10 years if you trade it back in.
A 36-month lease payment on the same car with no money down (never pay cash on a lease to lower your payments) would cost $374 per month or $13,386 over the life of the lease. If you took out 3, 36-month leases to cover the 10 years (plus one year), you’ll pay $44,570 over the same period.
So, by using just the math, you’re paying 97% more to lease over a 10-year period. OUCH! Also, remember that the numbers above are very rough estimates. There are a lot of assumptions. And different makes and models have different yearly costs of owning.
The Real Story
There are plenty of ways that the math only tells part of the story. First, the average amount of time people keep a new car is only about 6 years. If you buy a used car, the average amount of time is about 4 years.
Second, 8 out of 10 car loans are for longer than 6 years. See the correlation? Most people will simply roll over their car loan when it’s up. In other words, a lease-like behavior. You also risk being upside down in your car loan—owing more on the loan than the value of the car. So let’s redo the math with these figures. I’ll spare you the narrative of the detailed calculations but the cost of leasing during a 6-year term (assuming you got 2 new cars in this time) is still 60% more expensive than buying.
But there’s more to consider than just dollars and sense. Maybe you’re willing to pay for the peace of mind knowing that you won’t pay for any routine car repairs—not even routine maintenance if you negotiate well. Unless you get in an accident, you won’t pay for much of anything during your 3 year leasing period. Your car will also have all of the new safety features and if you know anything about cars, you know that advancements are being made in this area rapidly.
Others may have a career where they need a nicer/newer car—realtors, wealth managers, and other professionals where clients are in their car. If you’re planning to add children over the next few years, a lease may give you the ability to get a larger car as your family grows. There’s also a tax write-off for business owners who lease.
Finally, maybe you’ve saved money, became a tightwad in other areas of your budget, and you have plenty of financial cushion to get yourself a fancy new car ever 3 or so years. As long as your budget allows it, springing for something that doesn’t necessarily make great financial sense is well within your rights. Most people do that in areas of our life.
Be careful, though. If you drive a lot, leases may not be a good deal. You normally get between 10,000 and 12,000 miles per year. Above that, you have to pay for each mile.
Most people lease largely because they can’t afford to buy but you’re paying a high price for that.
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Disclosure: At our house we’ve had a leased car for a long time because of a unique situation where my wife’s employer pays for one of our cars.